Bulging Surplus: The Keynesian Revival

One of the policy prescriptions of Keynesian macroeconomics is that you run a budget surplus in good times, and a deficit in bad times.  The surplus helps reduce inflationary pressures and false boom in the economy compared with what would arise through a tax cut/spending splurge, and "stores" some of the benefits of the good times to be used during bad times.

The deficit in bad times helps ensure that a downturn is more shallow than it would otherwise be, and supports spending in a recession through unemployment benefits and, if required, public works.  It uses the stock of wealth build up in the good times for the community's benefit.

These together are the "automatic stabilisers" of economic policy, helping the economy through the business cycle.  Over time deficits and surpluses should sum to about zero, to ensure debt isn't increasing over time - though judging this is tricky.  And of course, the failure to follow this simple pattern was what caused "Keynesian" economics to get such a bad name.  Politicians in the 60s and 70s just kept increasing spending whether there was boom or bust, letting debt explode and helping to spark serious inflation.  It was a gigantic perversion of Keynes and it still muddies his name to this day.

In Michael Cullen's fiscal policy, we see a re-emergence of the "true Keynesian" approach.  His microeconomic interventions are very different - no massive public works programmes or wide benefit increases here - but the other parts are consistent.  Thus his criticism of National when they cut spending in 1998 - they did not allow the stabilisers to work, and thus caused a sharper and deeper recession than needed to simply protect a number - the budget surplus.

Thus also his refusal, in the face of mounting future pressure on the spending side through the boomers' retirement, to countenance splurging the current strong surplus on tax cuts or spending hikes.  As he so accurately states in the Dominion Post today, the surplus has come about through good management, not overtaxing people.

National's agenda is to shrink government.  The classic way to do this, in theory (it's not been done in practice), is to cut taxes during the good times, and then cut spending in the bad times.  Such actions deprive public services of the resources they need to be top notch, and are a blind bowing to ideology that is quite out of place in New Zealand.

After all, government spending here has already fallen from 45% of GDP in 1990 to about 34% of GDP today (including local govt).  That's a big cut, and contrary to the lies from the right, did not require the truncation of the welfare state or the total abolition of health and education for all.

It's a fantasy land agenda that says now is the time to cut taxes, and I'm pleased the government is staying the course and picking the correct -- instead of the popular -- option.

Comments

[hans]

Lord Keynes's policy recommendations were mainly to offset the lack of demand during a recession and to counter the perverse outcomes of 'orthodox' policies such as the gold standard. Interesting these days is the so-called independence of central banks to raise or lower interest rates to maintain inflation goals and currency stability (which you could call a modern version of the gold standard). Since the Reserve Bank pays little attention to output and unemployment except as a tool to lower wage inflation, as a policy priority it will be interesting to see how Labour Government Keynesianism will clash with RB's monetarism.

[Idiot/Savant]

I've been wondering about that myself...

[My Right]

Jordan - without having time to offer up counter arguments to Keynesian theory and talking 'balance' - one question.

Can we rule out a significant increase in spending next year, or will it be the right time in the Keynesian cycle to have a bit of a spend up? Coincidentally of course.

[Mark]

Still, it would be nice to get more in the hand at the end of the week. We've all got bills to pay

[Jordan]

My Right - the govt has increased spending in every budget it has done. I dare say next year's Budget will be perfectly consistent with that. It is still a good six months to the budget; the economy may have shown evidence of slowing by then.

I hope the govt takes the opportunity presented by half a decade of very careful management, to announce in the budget and the election manifesto some very significant programmes. I can think of several expensive problems out there that we'll have to fix, and if they make it on the agenda I'll be well pleased. I don't think that means an election year spendup though, no - that just doesn't happen in NZ politics any more.

Mark, yes, it would. I know my income has gone up by about 400% in the last five years, but that does include a transition from study to work. Most people are getting pay increases, as far as the stats seem to show.

[Millsy]

Well, I think its a bit rich to call for tax cuts when our health and education sectors are crying out for more cash and are on the verge of collapse.

[Conor Roberts]

Idiot/Savant if you have been thinking about how the Labour Government keynesianism will clash with RB's monetarism. You may want to try this very good opinion piece on "Second-guessing the Reserve Bank"
http://www.scoop.co.nz/mason/stories/HL0410/S00342.htm

[Jordan]

Millsy - if they are on the verge of collapse now, with salaries rising, staff increasing, 45% more cash in the system than in 1999........

what were they like then?

and how much more do you want to give them!?

[Idiot/Savant]

Conor: that's the thinking I was thinking of, yes...

[Chris]

We could maintain current spending and create a flat tax of 20c in the dollar for everybody and still have money left over!! It is scandalous that the government continues to thieve off us like this and no amount of bullshit third way labour spin neo-keynesian nonsense will justify it.

[Millsy]

Right Chris (you right wing prick)

Give me a list of hospitals and schools you would close and/or sell off to get your 20% tax rate. And a statement of how much you would cut benefits by.

Also. Please leave this blog and never come back. I dont want you here expressing your sick desire to destroy everything that this country stands for.

[Jordan]

Millsy - this isn't your blog. I welcome civil debate - you are stretching the boundaries, again. There is no point vilifying the right; you are just playing into their hands.

Chris - if a flat tax of 20c would raise the same revenue as the current system, then obviously we would be "thieving off you" just as much as we are today. If that isn't the case, then quite obviously you have a problem with your numbers, because revenue would fall. In case you'd missed it, most of the budget "surplus" is spent on investment activities. Either you would cut those, or you would borrow to fund them. Neither option is viable given the demographic challenges.

The spin is all yours my friend - you are pretending there's a free lunch out there. You're wrong.

[My Right]

Millsy - deep breaths my friend! As an aside - what politician out there is actually advocating constructive policy reform? Health is nightmare - I want a top rate health system as much as anyone. But it should be patently obvious that taxing more and funding more is not the sole solution.

A lot of us on 'the right' share your concerns - but we object to seeing tax and spend as the first (and sometimes only) solution from 'the left'.

Millsy - I happen to care about all people, sorry to have to tell you that in many ways, we're not so different you and I.

[hans]

A 20% tax rate would mean a tax increase on the lowest paid (who currently pay 19.5% in tax), right?

[Idiot/Savant]

Hans: yes. The rich want to cut their own taxes, while inceasing the burden on those least able to pay.

[Jordan]

ACT people keep falling into this trap, but to be fair to them they want a low top rate - they would keep the 19.5c rate on income below $38k.

They just keep using the "flat tax" mantra because it's the only way they will get any of their support back from the party led by ACT's 9th MP. :)

[sagenz]

millsy you are a classic. really entertaining. jordan do you supply rabies injections for visitors to the site?
Cullen has taken $2 from every extra $3 earned by working families over the last 5 years. do the numbers yourself. That is some marginal tax rate. unheard of in twenty years in new zealand

[Rich]

I'm yet to hear how the Nats and Act will fund their various promises to spend more money on prisons, police, jet fighters, warships, tanks, joining in Bush's various adventures, building new roads, etc. while at the same time cutting taxes?

I'm glad that the right are attacking the governments economic policies, however - I imagine there to be lots of votes in promising to increase unemployment from the present scandalously low levels.

[Millsy]

Jordan...you are correct. It is not my blog. It is yours. Therefore, I shall create my own blog, on which I shall smote the right.

[Millsy]

Jordan. Apologies for my outbursts on your blog. The time of those outbursts is over. I have created a blog of my own, which I plan to use as my own little soapbox.

It is below. Spread the word

http://leftwingnutter.blogspot.com

[Chris]

Oh I can hardly wait. Are you going to link to Nick Kelly as well?

Millsy: I'd sell most schools actually, if I could. The state does a shit job at educating people. Sell'em to the private sector and allow real choice in education (at the same time of course I'd get rid of most forms of tax - maybe keep a 3-4% sales tax to fund an army etc).

*waits for the inevitable vitriol* I love arguing with lefties. Your rightous fury and indignation that someone thinks they can spend their money better than the goverment is hilarious.